Inside Apple Stores, a Certain Aura Enchants the Faithful

Consumers at the new Apple store in Lower Manhattan.

By KATIE HAFNER, NY Times.
Published: December 27, 2007

It was 2 o’clock in the morning but in the subterranean retailing mecca in Midtown Manhattan, otherwise known as the Apple store, it might as well have been midafternoon.

Late one night shortly before Christmas, parents pushed strollers and tourists straight off the plane mingled with nocturnal New Yorkers, clicking through iPod playlists, cruising the Internet on MacBooks, and touch-padding their way around iPhones.

And through the night, cheerful sales staff stayed busy, ringing up customers at the main checkout counter and on hand-held devices in an uninterrupted stream of brick-and-mortar commerce.

The party inside that store and in 203 other Apple stores around the world is one reason the company’s stock is up nearly 135 percent for the year. By contrast, high-flying Google is up about 52 percent, while the tech-dominated Nasdaq index is up 12 percent.

The popularity of the iPhone and iPod and the intended halo effect those products have had on sales of Apple computers are behind Apple’s vigor. But the company’s success in retailing, as other competitors struggle to eke out sales growth, has been the bonus.

Apple now derives 20 percent of its revenue from its physical stores. And the number is growing. In the fourth quarter in 2007, which ended Sept. 30, Apple reported that the retail stores accounted for $1.25 billion of Apple’s $6.2 billion in revenues, a 42 percent increase over the fourth quarter in 2006.

Apple stores generate sales at the rate of about $4,000 per square foot a year, according to a report last year by Sanford C. Bernstein analysts.

As other electronics makers like Dell, Nokia and Sony still struggle to find the right retail formula, Apple seems to have perfected it.

Not only has the company made many of its stores feel like gathering places, but the bright lights and equally bright acoustics create a buzz that makes customers feel more like they are at an event than a retail store.

The close attention paid to detail in the stores’ designs, such as the maple veneer tables used for product displays, gives the impression that Steven P. Jobs himself, the company’s co-founder and chief executive, signed off on every square aesthetic inch of every store.

“Apple’s retail offering is very compelling,” said Andrew Neff, senior managing director at Bear Stearns, “but the other key is the product. The retail concept ties in very much to the product.”

But the secret formula may be the personal attention paid to customers by sales staff. Relentlessly smiling employees roam the floor, carrying hand-held terminals for instant credit-card swiping. Technicians work behind the so-called genius bar, ministering to customers’ ailing iPods, MacBooks and iPhones. Others, designated “personal trainers,” give one-on-one instruction and lead workshops.

Personal shoppers are available by appointment, and last month the company took the concept of personalized service to a new level, with concierge teams stationed throughout each store.

“They’ve become the Nordstrom of technology,” said Michael Gartenberg, vice president and research director at Jupiter Research, referring to the department store that is known for its service.

Ron Johnson, Apple’s senior vice president for retail, said he believed the high level of service played a large role in the success of the stores.

“The idea is that while people love to come to retail stores, and they do it all the time, what they really appreciate the most is that undivided personal attention,” Mr. Johnson said. The result is far fewer qualms among consumers about paying premium prices: $30 for an iPhone case, $200 for an iPod Nano or $1,200 for a computer.

This month, Apple opened its third Manhattan store, in a three-story, 10,500-square-foot renovated building in the meatpacking district on West 14th Street. With one entire floor dedicated to individualized services, along with small seminar series, Mr. Johnson’s goal is to make the 14th Street store “the most personal store ever created.”

Mr. Gartenberg said people often first go to an Apple store out of curiosity. “Apparently a lot of them like what they’re seeing in the stores, they like the experience and they go back to buy the products,” he said.

The stores’ architecture also makes consumers feel good about spending money there.

In nearly a dozen high-profile urban centers — including New York, San Francisco, London and Glasgow — the signature feature is a glass staircase. Some of the staircases go straight up and others ascend in a spiral skein that appears to be held in place by nothing more than Apple hype.

A customer entered the 14th Street store last week with his two whippets. Their reaction to the impressive stairs was more fear than awe. When the dogs refused to climb the steps, their owner scooped both of them into his arms and carried them up.

Apple stores encourage a lot of purchasing, to be sure. But they also encourage lingering, with dozens of fully functioning computers, iPods and iPhones for visitors to try — for hours on end.

The policy has given some stores, especially those in urban neighborhoods, the feel of a community center. Two years ago, Isobella Jade was down on her luck, living on a friend’s couch and struggling to make it as a fashion model when she had the idea of writing a book about her experience as a short woman trying to break into the modeling business.

Unable to afford a computer, Ms. Jade, 25, began cadging time on a laptop at the Apple store in the SoHo section of Manhattan. Ms. Jade spent hours at a stretch standing in a discreet corner of the store, typing. Within a few months, she had written nearly 300 pages.

Not only did store employees not mind, but at closing time they often made certain to shut Ms. Jade’s computer down last, to give her a little extra time. A few months later, the store invited her to give an in-store reading from her manuscript.

“Everyone is free to use the Internet and do anything they want — within reason,” said Paul Fradin, the general manager of the SoHo and 14th Street stores. Visitors spotted surfing pornographic Web sites are quietly asked to leave, and are escorted out.

Visitors can bring almost anything they like. Ms. Jade showed up nearly every day with her full set of notes, and enough food to see her through a few hours of writing.

Meanwhile, the Sony flagship store on West 56th Street, a few blocks from Apple’s Fifth Avenue store, has the hush of a mausoleum. And being inside the long and narrow blue-toned Nokia store on 57th Street feels a bit like being inside an aquarium.

The high-end Samsung Experience showroom, its nuevo tech music on full blast one recent morning, was nearly empty. And although that store professes to encourage hands-on exploration of its products, the showroom has a clinical, forbidding feel. (Nothing is actually sold there; it’s just for display.)

“Whenever we ask consumers to cite a great retail experience, the Apple store is the first store they mention,” said Jane Buckingham, president of the Intelligence Group, a market research firm in Los Angeles. “Basically, everything about it works. The people who work there are cool and knowledgeable. They have the answers you want, and can sell you what you need. Customers appreciate that. Even the fact that they’ll e-mail you a receipt makes you feel like you’re in a store just a little bit further ahead of everyone else.”

This could be part of the reason that Jack Graham, 16, visiting for the holidays from Worcester, England, spent at least an hour each day of his visit at one of the three New York Apple stores, his parents sitting by patiently, happy to watch the crowd.

“These stores are going to become iconic places that people go to see when they come to New York,” said Mr. Gartenberg, the analyst. “Rockefeller Center, Radio City Music Hall and Apple’s great glass cube on Fifth Avenue.”

As for Ms. Jade, whose modeling career is advancing, she has yet to buy a computer from the Apple store. But she is still welcome to check her e-mail — and stay as long as she likes.

Why Apple Isn’t Japanese

Once a technology leader, Japan is now struggling to find its place in the digital age.

By Christian Caryl
NEWSWEEK
Dec 1, 2007

Ever heard of DoCoMo? probably not, unless you happen to live in Japan. NTT DoCoMo is one of the world's biggest wireless phone companies. It operates in a ferociously competitive market, boasts about 50 million customers and has been known to produce cutting-edge technology. By all rights it ought to be a star performer in the increasingly global business of wireless communications. Yet DoCoMo's brand is still virtually unknown outside its home country.


This is one story that could have had a very different ending. At the turn of the century DoCoMo executives announced that they were setting out to conquer the world. Their company's star mobile Internet application, known as i-mode, was leading the pack in its home market, and DoCoMo planned to leverage that success into a bid to dictate wireless Internet standards around the world. The company went on a buying spree, trying to gain footholds by purchasing stakes in overseas companies—stakes that soon made for painful losses, and not much else, when the New Economy bubble popped soon thereafter.

The would-be worldbeater proved tone-deaf. DoCoMo managers were so enraptured with their state-of-the-art Internet service that they failed to notice that the long and intricate menus favored by Japanese consumers didn't score with foreign customers who were looking for more direct and intuitive interfaces. One reason for the failure to communicate: not a single person in the senior management of the company was non-Japanese. "With the right approach they could have become a Google," says Gerhard Fasol of the Tokyo consultancy Eurotechnology Japan. "They had the chance—but they blew it."

The fall of DoCoMo is only the most recent story in a long tale of Japanese innovation failures over the past two decades—a huge irony, given that Japan is a technological powerhouse. If you exult in brilliantly bizarre gadgetry, engineering wonkery and prodigious feats of craftsmanship, you'll feel right at home. It's also an extremely sophisticated business environment. The Japanese domestic market is big and nuanced; Japanese consumers are notoriously finicky and demanding.

On the face of things, it would all seem to add up to an entrepreneurial paradise, a playground of creativity and innovation. Japan spent $130 billion on research and development last year (more as a percentage of GDP than the United States or the EU, putting it in third place globally behind Sweden and Finland). It registers, far and away, more patents than any other country—even more than the United States, with more than twice the population.

So you'd think Japan would be confident about its technological future, but you'd be wrong. These days, big business, academia, think tanks, government and the media, as well as the average Japanese salaryman, are all brooding about the state of their economy in the digital era. The educational system is going down the tubes, it's said, generating math and science scores that increasingly lag behind other OECD countries. The government is gridlocked, stalling urgently needed economic reform. Managers are mired in old mentalities, while imaginative newcomers can't find the space or the capital to develop their ideas. It's a syndrome that's sometimes summed up in a single, angst-ridden question: how come we weren't the ones who invented the iPod?

It isn't just the iPod as a cool gadget that keeps the Japanese awake at nights. It's the iPod (and its relative the iPhone, soon to debut in Japan) as the supersuccessful symbol of a new way of doing business that causes the hand-wringing. While Japanese companies like DoCoMo, NEC, Sony and the like struggle with incremental improvement, competitors like Apple and Google are fusing innovative technology with great marketing, design and distribution to create entirely new product categories.

That's precisely what unnerves the Japanese. Bloggers and commentators routinely invoke Apple's success as a wake-up call for a country that once ruled the world's consumer-electronics market. Masamitsu Sakurai, the chairman of office-equipment maker Ricoh and head of one of Japan's leading industrial associations, shocked members of his group with a recent speech that held up the iPod as an example of an innovative Western product that Japan is finding hard to emulate because of its outmoded management.

There are many who would write off this sort of talk as heretical hyperbole. Japan, they argue, has a long track record as a country of innovation. "Lean manufacturing," low-mileage cars and Toyota's Prius hybrid must surely count for something. They also note that Japan is the land of Sony, a company that once represented, in the persons of its legendary cofounders, Masaru Ibuka and Akio Morita, the perfect fusion of engineering and marketing savvy.

But that was then. One reason Apple galls the Japanese so is that it has displaced Sony as the leading innovator in consumer electronics. Sony's last truly big thing was the Walkman, and many non-Japanese aren't even aware that the Walkman still exists—as a digital music player competing feebly against the iPod.

The lithe Sony of Morita's day has given way to a fat conglomerate, with interests in everything from finance to movies, that stumbles over its own feet. Because Sony has its own music division, its executives are jealous of their copyrights, so they set up a distribution system much less open than Apple's. That's one reason the Walkman holds a 23 percent market share in Japan, while iPod holds a 58 percent share, according to market researcher BCN.

The innovation crisis is in large part rooted in the country's peculiar corporate culture. Japan Inc. still remains dominated by big, vertically integrated dinosaurs with little maneuverability and a marked disinclination to creativity. Sony CEO Howard Stringer was brought in from America to shake things up in 2005 and has been struggling ever since to break down the barriers between company divisions.

The strict hierarchies of Japanese companies discourage people with radical new ideas. As James Mok of the Tokyo software consulting firm Apriso notes, "In the U.S. it's much easier to spin off the results of a particular project as a separate business." In Japan, a risk-averse culture makes it harder. Mok recently penned a study called "How the Japanese IT Industry Destroys Talent."

One notorious case in point involves Shuji Nakamura, the brilliant scientist who invented a revolutionary energy-saving blue-diode light source only to find himself mired in years of litigation as he struggled to extract royalty payments from the company that had profited from his invention. Nakamura ultimately abandoned Japan for California. Fasol recalls asking scientists at the University of Tokyo if they considered his departure a blow. " 'No, not at all,' they told me. 'It might be good to have someone more ordinary'." Sergey Brin and Larry Page, the youthful, productively offbeat cofounders of Google, wouldn't have stood a chance in Japan.

Nor would Google's remarkable culture of chaotic cross-pollination. In Japan, boundaries between groups (even inside companies) are clearly defined and hard to cross. Carl Kay, a U.S. consultant who has spent years analyzing Japanese service companies, recalls encountering several representatives of a leading Japanese computer maker at an Internet conference back in the United States in 1995. "We went to Starbucks together, and they said, 'We don't get it. Why would we want to use the Internet to talk to people outside of the company?' "

Insular Japanese companies are evidently ill poised to craft the sort of personalized, culturally specific content that is at the heart of much of technology and telecoms development today. But even straight-ahead research

is problematic. Stodgy government labs and big corporate research centers don't have great track records. Back in the 1980s the Japanese government spent hundreds of millions of dollars on a now forgotten project called the "Fifth Generation Computer." Americans, still reeling from Japan's stunning rise in cars and consumer electronics, watched with anxiety. In 1984, one U.S. computer magazine pronounced portentously: "The Japanese are planning the miracle product. It will come not from their mines, their wells, their fields, or even their seas. It comes instead from their brains."

Apparently, it's still there. Indeed, all too often Japan's technological prowess comes to a screeching halt when it comes to developing computers or the programs that run on them. "Japan was a technological powerhouse in the predigital world," says Keith Woolcock, a global tech strategist at Westhall Capital in London. "But they've never been a dominant computer maker. And the computer, linked with the Internet, is now the armature around which the whole world revolves." There are no Japanese operating systems; Toshiba, the laptop pioneer, is no longer a player in the PC market.

The reasons for this run deeper than a dysfunctional corporate culture. Among the problems: promotion based strictly on seniority (resulting in managers with little training in information technology), and a near-complete disconnect between universities and the corporate sector.

Takahiro Fujimoto, an economics professor at the University of Tokyo, poses another theory: that personal computers, software and hybrid gadgets like the iPod are "modular" products, made up of existing components that "people mix and match in an innovative way." The Japanese tend to excel at "integral" products like cars, with customized components designed from scratch. "When you need this kind of activity, it's likely that people will be working on the same floor for a long time as a team," says Fujimoto. "We are not good at dealing with genius individuals—we're good at teams." That consensus-oriented approach tends to preclude the sorts of disruptive innovation that companies like Google throw off practically at will.

One intriguing exception: Nintendo, the gaming company whose remarkable, easy-to-use Wii console has enabled it to break away from more-conventional rivals like Microsoft and Sony. But Nintendo is also the exception that proves the rule—it has cultivated an outsider image and pursued a distinctive strategy of tapping consumer groups traditionally uninterested in gaming. It's no accident that Nintendo, like several other more innovative companies, is based in Kyoto—far away from staid Tokyo.

The insularity issue, which underscores so much of the innovation problem, has reached a boiling point. One of Japan's leading business papers, The Nikkei, published a piece earlier this year describing how a senior executive at Sanyo Electric had an idea similar to the iPod back in 1997; when he tried to form an alliance with Apple to explore the technology, his company's own chairman refused. Today, the story noted, Sanyo is struggling to survive. The paper went on to point out that Japanese electronics companies depend to a large degree on sales to regulated industries and the government. The world's second biggest market, protected by the Japanese language and its own cloistered standards, offers many companies a profitable sanctuary. But, as the article concluded, Japanese companies must ultimately "face globalization."

Of course, Japan's obsessive, incremental approach to innovation is a perfectly good way to run some companies. Japanese steelmakers have a proprietary technology that makes their high-tech steel untouchable by Korean and Chinese competitors. They keep trying to close the gap, but the Japanese, given their extraordinary attention to detail, could very well manage to keep a few steps ahead—enough to maintain crucial comparative advantage.

Japan abounds with this sort of almost artisanal industrial company. Toyota's famous production philosophy of kaizen, or continuous improvement, is perhaps the ultimate example—a system where workers are constantly proposing small improvements that perpetually bring the manufacturing process closer to perfection. Over the short term, says Fujimoto, Japan shouldn't be afraid to maintain focus on those areas where it truly excels. But over the longer term, he warns, something will have to give. Growth industries, like technology, aren't about incremental improvement—they are about making big bets, and finding the next new new thing.

At this point, it is worth taking another look at the cautionary tale of DoCoMo. Today it is trapped in a domestic market with a diminishing population, watching as its nimbler rivals at home grab an ever-bigger piece of the shrinking mobile pie. Its only hope for decisive growth would have been to leapfrog into the global market. But it didn't happen, thanks mainly to the company's limited cultural horizons and unimaginative management. Just three years ago the value of DoCoMo's shares amounted to about 10 times that of Nokia's. Today Nokia (based in Finland, with a population of 5 million versus Japan's 127 million) has a market capitalization more than double that of DoCoMo's. That puts Nokia in the realm of other global giants like Apple, Google and Vodafone. And just look at who tops the list: China Mobile.

This drives home the point that the lesson for "them" (the Japanese) isn't necessarily that they should be more like "us" (the Americans). It's merely to warn that some serious adjustments might be in order. Over the next century, disruptive innovations won't be coming only from countries like the United States. They'll also be emerging from dynamic, hungry, rising economies that offer plenty of room for risk-taking, flights of fancy and cross-border synthesis. If the Japanese want to be a part of that club, they'll have to revamp not only how they think about technology, but how they think about themselves.

URL: http://www.newsweek.com/id/73236